Event Core
The Australian Government has stepped up to support Junior mineral explorers with exploration incentives accumulating to $100 million under Junior Minerals Exploration Initiative (JMEI) program. JMEI aims to increase new investment in small-scale minerals exploration companies and build an uninterrupted investment pipeline encompassing regional Australia. Long-term prospects of the program shall maintain Australia’s competitive edge in an international resource investment destination.
Industry Landscape – Resources
Australia’s resources industry has gone great guns in the face of COVID-19 adversities and degradation in international trade. As a result, Australia’s resources and energy exports escalated fivefold in the last two decades while footing on the largest reserves of iron ore, gold, and base metals.
The resources sector accounted for ~11% of the Gross Value Added (GVA) in 2020. According to The Australian Trade and Investment Commission, Australia’s resources sector is the largest recipient of Foreign Direct Investment (FDI) that drove the exports with $360.1 billion, representing 35.5% of the total FDI in 2019.
Figure 1: Movements in Capital Expenditure
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
Key Macro Parameters Driving Industry Growth
Surging Capital Expenditure: Despite COVID-19 impact, total capital expenditure in private mineral exploration grew from ~$3.61 billion in FY19 to ~$4.04 billion in FY20 and ~$2.15 billion to ~$2.46 billion in metals & other minerals. Private enterprise capital expenditure in exploration & other mining support services improved marginally to $349 million in March 2021, relative to $336 million in the March 2020 quarter. Australian Government’s introduction of whole expensing and temporary loss carry-back policies in the FY21 budget has established a tax-favorable business environment.
Workforce Status - In November 2020, employment in the mining sector edged up 8.5% relative to February 2020 employment levels. The extension of JobKeeper and Boosting cash flows for employers’ schemes lead to the most significant recorded subsidy in national accounts; annual employment in the mining industry descended marginally in FY20 to ~239,000 relative to ~247,000 workforces in FY19. However, labor participation and representations are consistently growing, primarily driven by the highest weekly average earnings of $2,697.50 posted in May 2020.
Global demand and Reach: For the December 2020 quarter, world trade widened by 4% (QoQ basis), counteracting the COVID-19 global pandemic and positioning 2020 growth at 1.3%. On the other hand, world industrial output fell 4.4% in 2020, amidst stymied demand and international trade resulting from COVID-19 related worldwide restrictions and lockdowns. China’s industrial output, a decent proxy for commodity demand, recovered from pandemic aftermaths by September 2020.
Figure 2: Mineral Exploration – Segmented Details
Source: Based on Australian Bureau of Statistics Data, Analysis by Kalkine Group
An Upward Trend Witnessed in Iron Ore Demand
Reinforced Global Demand: Iron ore export volume hit a record high in FY20 with the FY21 forecast of over $136 billion. Iron ore price clocked $US200/tonne – record highest in 2021. BHP is set to bring its South Flank project to reach 80 million tonnes/year in 2021. Exploration expenditure stood at $111 million in December 2020 quarter, up by 31% PcP.
Improving Production: In 2020, Iron ore annual production stood at ~916Mt, and annual export stood at 858Mt relative to ~916Mt and ~818Mt in 2019, respectively. Rising Chinese demand and supply chain disruptions in Brazil closed 2020’s iron ore price at $US140/tonne – highest recorded since 2011.
Gold’s Demand and Trailing Prospects
Dented Global Demand: In 2020, Global gold consumption was significantly struck by the COVID-19 pandemic, leading to a 14% decline to 3,760 tonnes. Jewelry consumption in India and China was nosedived by 42% and 35%, respectively. Moreover, gold consumption in industrial fabrication plummets by 7.4% amidst containment measures in the face of COVID-19 adversities.
Improving Growth Prospects: Gold-backed ETFs holdings improved by 120%, which surged gold imports by 8.3% in jewelry, gold bars & coins, and ETFs. In addition, gold production inclined to ~329 tonnes in FY20 relative to ~322 tonnes in FY19.
2020 Overview on Base Metals
As a repercussion of the ceased mining operations of Panoramic Resources’ Savannah mine in Western Australia and Hillgrove Resources’ Kanmantoo mine in South Australia, copper production is expected to fall; however, export earnings are expected to incline by 17% YoY amidst price recovery. Nickle exports are expected to reach $3.6 billion in 2020-21, primarily driven by growth in EV battery manufacturing and low global supply. Moreover, Australia’s mined zinc production was aggravated by 5.4% (QoQ) in the December 2020 quarter.
Figure 3: Key Risks and Challenges
Source: Analysis by Kalkine Group
Key Risks and Challenges
Australia holds an undiversified portfolio of trade partners in the minerals and resources business, resulting in high systematic risks. Western Australia is highly susceptible to regular disruptions in transport and production amidst extreme weather conditions. The growing use of scrap steel in China is expected to neutralize the soured demand for iron ore which may adversely affect export volume and price. With no gold, exports billed to China, and sluggish demand in the UK, US, and Switzerland, FY21 estimates for gold export earnings may decline. Export earnings in base metals are highly reliant on Chinese industrial production, hence subject to high systematic risks.
Outlook
ABS estimates ~$36.94 billion in new capital expenditure in the mining industry, a 1.5% increase from previous estimates. Australia’s energy and resources exports are estimated to strike $296 billion in FY21. For March 2021 quarter, exploration expenditure in iron ore has surged by 37% QoQ, complementing historically high levels of iron ore prices. As a result, the estimates for Australia’s gold exports in FY22 and FY23 have been revised upwards by 7% and 6.5%, respectively. Base Metal prices have outpaced pre-pandemic levels with soaring international demand and usage. Considering the improvement in the Australia’s resources sector, we have figured out 4 stocks on ASX that are set to see the momentum.
(1) OZ Minerals Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 7.16 billion, Annual Dividend Yield: 1.20%)
Favorable Volume and Price Driving Top-line and Bottom-line with Margins Intact: OZ Minerals Limited (ASX: OZL) is engaged in the mining and processing of copper, gold, and silver ore. For FY20, total revenue increased to $1,342 million relative to $1,107 million in FY19 due to favorable gold volumes and prices. Consequently, underlying EBITDA stood at $606 million relative to $463 million in FY19. NPAT increased substantially by 30% PcP and stood at $213 million. Apart from surged volumes and price, a $99.8 million production cost decrease in Prominent Hill and Carajas lead to improved NPAT results.
For Q1FY21, total copper production surged to 26,842 tonnes compared to 20,231 PcP, and total gold production marginally declined to 55,150 ounces compared to 55,606 ounces. OZL maintains a strong cash position of $114 million and a liquidity position of $95 million in debt. All-in Sustaining Costs increased to 136.5 US cents/lbs in Q1 FY21 relative to 74.9 US cents/lbs in PcP.
Outlook: Drilling has commenced in three ways project, funded by OZL, which exhibits high conductance targets; hence a promising revenue pipeline. Production guidance for total copper and total gold shall vary around 120,000 – 145,000 tonnes and 190,000 – 215,000 tonnes. Global demand for copper remains robust with increasing requirements for infrastructure and technology.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs OZL (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of OZL went down by ~7.552%. The stock made a 52-weeks' low and high of $12.500 and $27.150, respectively. The stock outperformed the market volatility index. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Moreover, we believe that the company can trade at some premium compared to its peer's average, considering growing copper demand and cost-effective measures. For this purpose, we have taken peers like Poseidon Nickel Ltd (ASX: POS), Strandline Resources Ltd (ASX: STA), IGO Ltd (ASX: IGO), to name a few. Considering the strong liquidity position, favorable demand & prices, and valuation, we give a 'Buy' rating on the stock at the current market price of $20.810, down by 3.524% as of 19 July 2021.
(2) Westgold Resources Limited (Recommendation: Buy, Potential Upside: Low Double-Digit)
(M-cap: A$ 816.45 million, Annual Dividend Yield: 0.00%)
Considerable Improvements in Volume and Growth Capex to Manifest Cash Flow Uptrend: Westgold Resources Limited (ASX: WGX) is engaged in gold production with operations in the Central Murchison region of Western Australia. In FY20, WGX registered an 18% growth in revenue and stood at $492.3 million due to a 7% increase in gold sales. Gold loan debt as of 30 June 2021 was fully repaid, and net assets inclined by 18%. WGX assumed a significant surge of 92% in cash flow from operations and stood at $155.7 million.
Despite the COVID-19 challenges, WGX managed to register 32% growth in H1FY21 results and stood at $301.8 million with improved sales volume, up by 8%. Net cash flow from operations assumed a significant jump of 157% and stood at $139.8 million with a strong cash balance position, up by 18%, amidst considerable capital expenditure in growth projects. For Q3FY21, cash and bullion registered $178.0 million at the quarter ended with a 9% cash build-up. AISC stood at $1,399/oz, and the cash cost of sales stood at $1,158/oz.
Outlook: A growth and expansion strategy was put in place to develop three new mine projects during H2FY21 – Fender underground mine at CGO, Aladdin open pit at MGO, and Bluebird underground mine. WGX’s production guidance for FY21 ranges between 245,000 – 250,000 oz, with ASCI in the range of $1,460 – 1,560/oz.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs WGX (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of WGX went down by ~10.244%. The stock made a 52-weeks' low and high of $1.835 and $2.980, respectively. The stock underperformed the market volatility index. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). Moreover, we believe that the company can trade at some premium compared to its peer's average, considering significant cash position and considerable capex in growth expenditure. For this purpose, we have taken peers like Resolute Mining Ltd (ASX: RSG), Rio Tinto Ltd (ASX: RIO), Macmahon Holdings Ltd (ASX: MAH), to name a few. Considering the substantial growth expenditure, an uptrend in gold volume & sales, and valuation, we give a 'Buy' rating on the stock at the current market price of $1.840, down by 4.416% as of 19 July 2021.
(3) Whitehaven Coal Limited (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 2.23 billion, Annual Dividend Yield: 0.00%)
Seeking Growth Opportunities with Expectations of Coal Price Rebound: Whitehaven Coal Limited (ASX: WHC) exports high-quality thermal and metallurgical coal from Australia to the rest of the world. For FY20, Underlying EBITDA declined to $306.0 million relative to $1,041.7 million PcP due to decreased global coal prices and decreased sales volume. Consequently, operating cash flow declined to $146.4 million relative to $916.5 million PcP. WHC stood on $106.8 million cash as of 30 June 2020. The gearing ratio surged to 20% relative to 4% in FY19.
For H1FY21, revenue declined to $699.3 million relative to $885.1 million as a result of slow pace in price recovery. EBITDA stood at $37.2 million relative to $177.3 million in H1FY20 as a result of significant impact from COVID-19 and downward pressure on coal prices. WHC assumed improved operational performance as highlighted by decrease in unit cost to $70/tonne relative to $76/tonne PcP. Gearing further increased to 21% from 20% PcP for a disciplined capital flow.
Outlook: WHC seeks growth opportunity with Maules Creek and Narrabri Stage 3 Extension Project with an approved production of 13Mtpa ROM and 11Mtpa ROM, respectively. As far as global parameters are concerned, a rebound in coal prices is expected by a knowledgeable consensus.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs WHC (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of WHC went up by ~10.995%. The stock made a 52-weeks' low and high of $0.830 and $2.270, respectively. The stock outperformed the market volatility index. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). However, we believe that the company can trade at some discount compared to its peer's average, considering unfavorable movements in coal prices. For this purpose, we have taken peers like Mount Gibson Iron Ltd (ASX: MGX), Resolute Mining Ltd (ASX: RSG), Macmahon Holdings Ltd (ASX: MAH), to name a few. Considering high expectations of coal price recovery, growth opportunities attached to Maules Creek and Narrabri Stage 3 Extension Project, and valuation, we give a 'Hold' rating on the stock at the current market price of $2.120, down by 1.852% as of 19 July 2021.
(4) Aurelia Metals Ltd (Recommendation: Hold, Potential Upside: Low Double-Digit)
(M-cap: A$ 586.50 million, Annual Dividend Yield: 2.19%)
Significant Investment Returns and Production Levels Driving Cash Flows: Aurelia Metals Limited (ASX: AMI) is engaged in base metals and gold mining and exploration. For FY20, AMI reported $331.8 million in revenue relative to $295 million PcP while a marginal decline in EBITDA margins from 35% in FY19 to 31% in FY20. Revenue surge was considerably driven by the $53.7 million net sales price impact of gold. In addition, NPAT declined to $29.4 million from $36.0 million PcP due to increased operating costs of $34.6 million from mining and processing activities.
In H1FY21, gold production stood at 45.9 koz at an AISC of $1,035/oz. Sales revenue inclined by 26% PcP and stood at $207.7 million, and EBITDA improved by 44% PcP and stood at $72.3 million. Underlying NPAT inclined by 164% PcP and stood at $41.1 million due to $20.5 million in gold revenue and $22.0 million in by-product revenue at low operating costs. Operating mine cash flow stood at $95.3 million, up by 57% PcP in consequence of combined investments in exploration & growth and 28% lower sustaining capital PcP.
Outlook: As reported on 1 July 2021, Kairos delivered additional high grades adding volumes to the revenue stream for FY21. AMI has also extended the mineralization of gold at Dargues with new drilling results, which focused on extensional and infill drilling on the eastern portion of the Main Lode. As a result, FY21 guidance for gold production remains at 100 – 113 koz with $1,425 – 1,575/oz in AISC.
Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative)
A-VIX vs AMI (Source: REFINITIV)
Stock Recommendation: Over the last month, the stock of AMI went up by ~22.973%. The stock made a 52-weeks' low and high of $0.345 and $0.636, respectively. The stock outperformed the market volatility index. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). However, we believe that the company can trade at some discount compared to its peer's median, considering potential resistance in gold demand. For this purpose, we have taken peers like Resolute Mining Ltd (ASX: RSG), Macmahon Holdings Ltd (ASX: MAH), Regis Resources Ltd (ASX: RRL) to name a few. Considering the favorable top-line & bottom-line performance, expansion strategies, prudent liquidity position, and valuation, we give a 'Hold' rating on the stock at the current market price of $0.455, down by 4.211% as of 19 July 2021.
Comparative Price Chart (Source: REFINITIV)
Note 1: The reference data in this report has been partly sourced from REFINITIV.
Note 2: Investment decisions should be made depending on investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock of the Target Price mentioned as per the Valuation has been achieved and subject to factors discussed above.
Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.
Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.
There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.
You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.
The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.
Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.
Please also read our Terms & Conditions and Financial Services Guide for further information.
On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine do not hold interests in any of the securities or other financial products covered on the Kalkine website.